London is home to around 800 funds, which is roughly 10% of the global total. As a financial centre, London is responsible for 80% of European hedge fund assets. This unparalleled success has brought with it both external attention and additional issues to be confronted by managers and their advisors. According to Julian Young, a Partner with Ernst & Young, there is a huge amount of activity taking place within London’s hedge fund sector at the moment, including new launches and start-ups, allocations of seed capital from investment banks and venture capital funds, and institutions creating or buying-in their own centres of expertise.
“We’re also seeing assets starting to concentrate with the major players and the emergence of some truly international organisations,” Young says. “This presents funds with opportunities, both for regulatory and taxation arbitrage, as well as challenges in managing a multi-regional business.”
Many London-based firms are now facing the prospect of broader regulation and oversight from a variety of sources. The call for transparency seems likely to get louder as investors, regulators and even governments seek to glean basic information on hedge funds. “We’re seeing that the rigours of internal audit, risk frameworks, FRAG and SAS reports are being actively pursued among our larger clients, and we think that will only permeate,” Young comments.
Mixed performance from funds in 2006 has reduced appetite for infrastructure upgrades and corporate change, and is likely creating pent-up demand for investing in operations once numbers improve again. Many firms are taking on additional institutional capital, causing managers to review the due diligence processes they initially established when they were founded. This requires managing the balance between the entrepreneurial culture that characterises hedge funds against the more control-oriented demands inherent in a fund management business that handles institutional accounts.
Another key theme in the UK hedge fund industry is the increased convergence between the worlds of hedge fund management and private equity. Although Blackstone and Carlyle have launched their own hedge funds this year, it has largely been hedge funds that have been venturing into the private equity space, as they seek new investment opportunities on their quest to boost returns and diversify risk. Hedge funds are increasingly becoming lenders in transactions, participating in illiquid transactions and tackling the new legal and administrative burdens such deals bring with them.
Regulation also remains close to the top of the agenda for hedge funds. To date the regulatory burden has remained relatively light: the initial salvo by the SEC to force hedge fund firms to register as investment advisors has been thwarted but uncertainty remains in Europe about the direction of regulation there. “Recent regulatory engagement has provided positive signals,” says Young. “For instance, we think there has been a generally positive conclusion to the debate on side letters, and we hope that, in spirit, this will provide the template for future engagements around issues such as investment valuation, the use of derivatives and side pockets.”
“We’re also seeing assets starting to concentrate with the major players and the emergence of some truly international organisations,” Young says. “This presents funds with opportunities, both for regulatory and taxation arbitrage, as well as challenges in managing a multi-regional business.”
Many London-based firms are now facing the prospect of broader regulation and oversight from a variety of sources. The call for transparency seems likely to get louder as investors, regulators and even governments seek to glean basic information on hedge funds. “We’re seeing that the rigours of internal audit, risk frameworks, FRAG and SAS reports are being actively pursued among our larger clients, and we think that will only permeate,” Young comments.
Mixed performance from funds in 2006 has reduced appetite for infrastructure upgrades and corporate change, and is likely creating pent-up demand for investing in operations once numbers improve again. Many firms are taking on additional institutional capital, causing managers to review the due diligence processes they initially established when they were founded. This requires managing the balance between the entrepreneurial culture that characterises hedge funds against the more control-oriented demands inherent in a fund management business that handles institutional accounts.
Another key theme in the UK hedge fund industry is the increased convergence between the worlds of hedge fund management and private equity. Although Blackstone and Carlyle have launched their own hedge funds this year, it has largely been hedge funds that have been venturing into the private equity space, as they seek new investment opportunities on their quest to boost returns and diversify risk. Hedge funds are increasingly becoming lenders in transactions, participating in illiquid transactions and tackling the new legal and administrative burdens such deals bring with them.
Regulation also remains close to the top of the agenda for hedge funds. To date the regulatory burden has remained relatively light: the initial salvo by the SEC to force hedge fund firms to register as investment advisors has been thwarted but uncertainty remains in Europe about the direction of regulation there. “Recent regulatory engagement has provided positive signals,” says Young. “For instance, we think there has been a generally positive conclusion to the debate on side letters, and we hope that, in spirit, this will provide the template for future engagements around issues such as investment valuation, the use of derivatives and side pockets.”
